1. Kuveyt Turk Participation Bank
RISK MANAGEMENT
IN ISLAMIC BANKS
Hüseyin Cevdet YILMAZ
CRO
Kuveyt Turk Participation Bank

2. RISK MANAGEMENT FRAMEWORK
A comprehensive risk management and reporting process; to identify, measure, monitor, report and control the risks IIFS’ exposed to,
Board and senior management oversight,
To have sufficient level of capital base to cover these risks,

3. RİSK MANAGEMENT FRAMEWORK
Concerns similar to all financial institutions, like Basel Committee/IFSB principles related to credit, market, liquidity and operational risks are valid, however, more, specific risks only for Institutions Offering Islamic Financial Services (IIFS), shall be considered.

4. CREDIT RISK Strategy for financing, shariah compliant,
Due diligence review,
Measuring and reporting credit risk exposures,
at murabaha, musharakah, leasing
and others,
Shariah Compliant credit risk mitigation
techniques,

5. EQUITY INVESTMENT RISK
Strategy
Mutually agreed appropriate valuation methods
Reporting process related to mudarabah and musharakah investments,
Exit strategies,

6. MARKET RISK Framework for market risk management
Exposing high price volatility,
Commodities,
Sukuk,
Increasing due to new products

7. LIQUIDITY RISK Liquidity risk management framework,
Considering current accounts, unrestricted investment accounts, restricted investment accounts,
LCR, NSFR and liqudity stress tests on hand,
Sufficient shariah compliant funds,
Commodity murabaha and sukuk,

8. RATE OF RETURN RISK
Potential impact analysis of rates of return versus expected rates,
Managing Displaced Commercial Risk

9. OPERATIONAL RISK Operational risk management framework,
Systems and controls for shariah rules,
Interests of fund providers, safeguarded,

10. REPUTATIONAL RISK
Failuring in governance, business strategy and processes,
Shariah non-compliance, critical

11. BOD and SENIOR MANAGEMENT OVERSIGHT
BOD approve risk management strategies, policies, procedures in line with risk profile and risk tolerance of financial institution,
Effective risk management,
Throughout the organization,
Appropriate shariah structure,

12. BOD and SENIOR MANAGEMENT OVERSIGHT
BOD approve limits for financing and investments,
Avoids concentrations, diversification
Hold adequate capital,
Independent risk management reporting directly to BOD

13. RISK MANAGEMENT PROCESS
Sound process of risk management,
Adequate system of controls; integrated risk management, shariah rules, regulatory and internal policies,
Adequate disclosures,

14. RISK MANAGEMENT PROCESS
Integrated credit risk management, related to market risk or operational risks,
Risk Appetite,
Risk Diversification,
Asset Allocation,

15. RISK MANAGEMENT PROCESS
Approved types of financing, prohibited transactions,
Risk Appetite, expected rate of return with associated risk, risk concentration managed effectively,

16. RISK MANAGEMENT PROCESS
Risk Mitigation Techniques;
- mark-up rates by risk rating
- collaterals
- clear documentation
- laws for contracts,
- shariah compliant insurance,

17. RISK MANAGEMENT PROCESS
Matching of investment policies with Investment Account Holder’s (IAH) risk appetite,
Asset and Liability Management properly,
Diversification of funding base,
Managing maturity mismatch,

18. RISK MANAGEMENT PROCESS
Identifying shortfalls in liquidity,
Management of IAH’s expectations,
Net funding requirements, internal assessment of expectations,
Scenarios, stresses for liquidity, various types,
Liquidity Contingency Plan,

19. RATE OF RETURN RISK
To meet the expectations of IAH’s, market pressure, asking more return than earnings, due to competition, might be causing withdrawal of funds,
When there is mismatch between assets and liabilities,
Shareholders might decide to waive their rights to fund owners, BOD approval,

20. DISPLACED COMMERCIAL RISK
Profit Equalisation Reserve,
Investment Risk Reserve,
To maintain a level of return for IAH,
Supervisory authority regulating,
Mitigating Displaced Commercial Risk when necessary,

21. OPERATIONAL RISK
Failure in controls, systems, processes, people or external events,
Adequate systems and controls,
Shariah Board, Shariah rules, great importance for sustainability,
Protecting interest of fund providers,

22. OPERATIONAL RISK Sound control environment necessary,
Implemented throughout the organization,
Control self assessments,
Periodic controls,

23. SHARIAH NON-COMPLIANCE RISK
Adequate systems and controls for shariah rules,
Shariah Board, having appropriate power, independent,
Complying with shariah rules,
Contracts signed comply with shariah rules,

24. SHARIAH NON-COMPLIANCE RISK
Shariah Compliance Review, by Shariah Compliance Department, Shariah Auditors and or external audit,
Ensuring financing and operations comply with shariah rules,
Policies, procedures, contracts approved by Shariah Board,

25. FUDICIARY RISK Protecting interests of fund providers,
The interests of fund providers and own funds, needs to be balanced,
Asset, Revenue, Expense and Profit Allocation to be ensured,
Responsibility,
Clear and Formal Policies,
Not discriminating against IAH,
Disclosing information,

26. ROLE OF SUPERVISORY AND REGULATORY AUTHORITY
Adequate understanding of risks related to IIFS,
Asking adequate risk management and reporting process,
Sound guidelines developing,
Detailed description of financing instruments,
Minimum required documentation for financing,

27. ROLE OF SUPERVISORY AND REGULATORY AUTHORITY
Asking adequacy of policies and procedures,
Monitoring equity investment risk policies and procedures, sufficient capital,
Asking adequacy of internal limits set for market risk management,
Asking adequate liquidity policies, systems and controls,

28. ROLE OF SUPERVISORY AND REGULATORY AUTHORITY
Lender of last resort providing shariah compliant mechanisms for liquidity,
Monitoring IIFS having capacity to manage rate of return risk, behavioral and maturity profiles,
Asking framework for profit/loss distribution,

29. ROLE OF SUPERVISORY AND REGULATORY AUTHORITY
Asking comprehensive framework for control environment,
Asking adequate Shariah Compliance mechanism,
Asking fudiciary duties for IAH,

30. TO BE SUSTAINABLE
REASONABLE RISK LEVEL

31. THANK YOU..